UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2006
Commission File No. 0-27857
AcuNetx, Inc.
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(Exact name of small business issuer as specified in its charter)
Nevada 88-0249812
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1000 S. McCaslin, Suite 300, Superior, CO 80027
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(Address of principal executive offices)
303-494-1681
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(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file for
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No X
As of March 31, 2006 the issuer had 56,675,987 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one) [ ] Yes; [X] No
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
This Report on Form 10-QSB contains a number of forward-looking statements
that reflect management's current views and expectations with respect to our
business, strategies, products, future results and events and financial
performance. All statements made in this Report other than statements of
historical fact, including statements that address operating performance, events
or developments that management expects or anticipates will or may occur in the
future, including statements related to distributor channels, volume growth,
revenues, profitability, new products, acquisitions, adequacy of funds from
operations, statements expressing general optimism about future operating
results and non-historical information, are forward-looking statements. In
particular, the words "BELIEVE," "EXPECT," "INTEND," "ANTICIPATE," "ESTIMATE,"
"MAY," "WILL," variations of such words, and similar expressions identify
forward-looking statements, but are not the exclusive means of identifying such
statements and their absence does not mean that the statement is not
forward-looking. These forward-looking statements are subject to certain risks
and uncertainties, including those discussed below. Our actual results,
performance or achievements could differ materially from historical results as
well as those expressed in, anticipated or implied by these forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Readers should not place undue reliance on these forward-looking
statements, which are based on management's current expectations and projections
about future events, are not guarantees of future performance, are subject to
risks, uncertainties and assumptions (including those described below) and apply
only as of the date of this Report. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below
"Management's Discussion and Analysis and Plan of Operation," as well as those
discussed elsewhere in this Report, and the risks discussed in our most recently
filed Annual Report on Form 10-KSB and in the press releases and other
communications to shareholders issued by us from time to time which attempt to
advise interested parties of the risks and factors that may affect our business.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACUNETX, INC.
BALANCE SHEETS
MARCH 31,
2006 2005
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ASSETS
Current Assets
Cash $ 479,689 $ 765,507
Certificate of Deposits 307,624 --
Accounts receivable, net 116,117 56,559
Note Receivable, net of allowance for loan loss of $58,218 -- 18,231
Inventory 346,607 263,381
Prepaid expenses 78,211 31,309
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Total Current Assets 1,328,248 1,134,987
Property and equipment, net 32,815 835
Goodwill 4,823,138 --
Intellectual Property 96,315 --
Deferred Tax Assets 220,635 219,233
Other Investments 169,399 --
Other Assets 1,563 2,662
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TOTAL ASSETS $ 6,672,113 $ 1,357,717
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 225,309 $ 21,352
Accrued liabilities 79,596 37,443
Notes Payable, current portion 144,926 --
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Total Current Liabilities 449,831 58,795
Long-term debt 121,677 40,000
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Total Liabilities 571,508 98,795
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Stockholders' Equity
Common stock, $0.001 par value; 100,000,000 shares authorized;
56,675,987 shares issued and outstanding 56,676 18,083
Paid-in capital 9,527,873 3,564,870
Accumulated deficit (3,483,944) (2,324,031)
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Total Stockholders' Equity 6,100,605 1,258,922
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,672,113 $ 1,357,717
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
ACUNETX, INC.
STATEMENTS OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31,
2006 2005
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Sales - products $ 283,575 $ 316,909
Cost of sales - products 120,813 150,051
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Gross profit 162,762 166,858
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Selling, general and administrative expenses 827,679 240,774
Stock Option Expense 108,030
Research and Development 45,556
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Total Operating Expenses 981,265 240,774
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Operating loss (818,503) (73,916)
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Other Income (Expense)
Interest and Other income 5,827 150
Loss on equity-method investments (17,886) --
Interest expense (10,802) (894)
------------ ------------
Other Expense, net (22,861) (744)
Net loss before taxes (841,364) (74,660)
Provision for income taxes 1,166 800
------------ ------------
Net loss $ (842,530) $ (75,460)
============ ============
Net loss per share-basic and diluted $ (0.02) $ (0.00)
============ ============
Weighted average number of shares 53,860,247 17,949,748
The accompanying notes are an integral part of these financial statements.
4
ACUNETX, INC.
STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31,
2006 2005
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CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (842,530) $ (75,460)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 2,152 40
Issuance of stock and stock options for services 193,030 68,000
Provision for bad debt 1,712 --
Deferred income tax 366 --
Loss on investment accounted for under equity method 17,886 --
(Increase) Decrease in:
Accounts receivable (1,730) (12,067)
Inventory 11,192 (82,673)
Prepaid and other assets (25,347) 13,832
Increase (Decrease) in:
Accounts payable and accrued expenses (59,799) 5,100
----------- -----------
Net cash used in operating activities (703,068) (83,228)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Increase in certificate of deposits (2,350) --
Purchase of property and equipment (2,671) --
Capitalization of patent costs (6,694) --
Repayments received from notes receivable -- 1,500
----------- -----------
Net cash provided by (used in) investing activities (11,715) 1,500
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sales of common stocks 1,036,529 --
Net proceeds from exercising of stock warrants 20,000 --
Repayments on notes payable (33,397) --
----------- -----------
Net cash used in financing activities 1,023,132 --
----------- -----------
NET INCREASE (DECREASE) IN CASH 308,349 (81,728)
CASH BALANCE AT BEGINNING OF PERIOD 171,340 847,235
----------- -----------
CASH BALANCE AT END OF PERIOD $ 479,689 $ 765,507
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Taxes Paid $ -- $ 800
Interest Paid $ 13,416 $ --
The accompanying notes are an integral part of these financial statements.
5
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC)
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: AcuNetx, Inc. (the "Company" or "AcuNetx", formerly known as
Eye Dynamics, Inc. or "EDI") designs, develops, produces and markets diagnostic
equipment that measures, tracks and records human eye movements, utilizing the
Company's proprietary technology and computer software. The products perform
separate, but related, functions and target two separate markets. First, the
Company markets a neurological diagnostic product that tracks and measures eye
movements during a series of standardized tests, as an aid in diagnosing
problems of the vestibular (balance) system and other balance disorders. Second,
the Company's impairment detection devices target the corporate and criminal
justice markets and are designed to test individuals for impaired performance
resulting from the influences of alcohol, drugs, illness, stress and other
factors that affect eye and pupil performance. The Company is a Nevada
corporation formed in 1989 and qualified to do business in California in 1992.
On December 23, 2005, the Company completed the merger with OrthoNetx, Inc.
("OrthoNetx" or "ONX"), a Colorado-based provider of medical devices for
osteoplastic surgery. The acquisition was completed as a stock transaction in
which ONX shareholders received the number of shares equal to the number of
EDI's outstanding shares at the closing date.
Following the merger, the Company changed its name to AcuNetx, Inc. and shifted
its headquarters to Superior, Colorado. The President and CEO of ONX assumed the
position of President and CEO of the merged company.
A summary of significant accounting policies follows:
Presentation of Interim Information: The financial information at March 31, 2006
and for the three months ended March 31, 2006 and 2005 is unaudited but includes
all adjustments (consisting only of normal recurring adjustments) that the
Company considers necessary for a fair presentation of the financial information
set forth herein, in accordance with accounting principles generally accepted in
the United States of America ("U.S. GAAP") for interim financial information,
and with the instructions to Form 10-QSB. Accordingly, such information does not
include all of the information and footnotes required by U.S. GAAP for annual
financial statements. For further information refer to the Consolidated
Financial Statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2005.
The results for the three months ended March 31, 2006 may not be indicative of
results for the year ending December 31, 2006 or any future periods.
Reclassification: Certain prior period balances have been reclassified to
conform to the current period presentation.
Principle of Consolidation and Presentation: The accompanying financial
statements include the accounts of AcuNetx, Inc. and its divisions after
elimination of all intercompany accounts and transactions. Certain prior period
balances have been reclassified to conform to the current period presentation.
Use of estimates: The preparation of the accompanying consolidated financial
statements in conformity with accounting principles generally accepted in the
United States (U.S. GAAP) requires management to make certain estimates and
assumptions that directly affect the results of reported assets, liabilities,
revenue, and expenses. Actual results may differ from these estimates.
6
Intellectual Property: The Company capitalizes intellectual property costs as
incurred, excluding costs associated with Company personnel, relating to
patenting its technology. As of March 31, 2006, the capitalized costs, the
majority of which represent legal fees, are related to a patent application. If
the Company elects to stop pursuing a particular patent application or
determines that a patent application is not likely to be awarded or elects to
discontinue payment of required maintenance fees for a particular patent, the
Company, at that time, records as expense the capitalized amount of such patent
application or patent. Awarded patents will be amortized over the shorter of the
economic or legal life of the patent.
Goodwill: Goodwill represents the excess of the purchase price in the merger
with OrthoNetx (see Note 9 to interim unaudited consolidated financial
statements) over the fair value of net tangible and intangible assets acquired
in the merger. Goodwill amounts are not amortized, but rather are tested for
impairment at least annually. There was no impairment of goodwill for three
months ended March 31, 2006. The Company had no goodwill in 2005
Investment: The Company held 20% of the issued and outstanding common stock of a
Colorado privately-held company. The Company accounts for the investment using
the equity method of accounting. Under the equity method, the carrying amount of
the investment is increased for its proportionate share of the investee's
earning or decreased for its proportionate share of the investee's loss. During
the three month period ended March 31, 2006, the Company recorded losses of
$17,886 as its pro rata share of net losses in this privately-held company. The
Company had no equity method investment in 2005.
The Company monitors the investment for impairment and makes appropriate
reductions in carrying value if the Company determines that an impairment charge
is required based primarily on the financial condition and near-term prospects
of this company.
Income (Loss) Per Common Share: Basic net income (loss) per share includes no
dilution and is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common stock outstanding for the
period. Diluted earnings per share is computed by dividing net income by the
weighted average number of shares outstanding and, when, diluted, potential
shares from options and warrants to purchase common stock using the treasury
stock method. Diluted net loss per common share does not differ from basic net
loss per common share since potential shares of common stock are anti-dilutive
for all periods presented.
Stock-based Compensation: Prior to January 1, 2006, the Company's stock option
plans were accounted for under the recognition and measurement provisions of APB
Opinion No. 25 (Opinion 25), "Accounting for Stock Issued to Employees," and
related Interpretations, as permitted by FASB Statement No. 123, "Accounting for
Stock-Based Compensation" (as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure") (collectively SFAS 123). No
stock-based employee compensation cost was recognized in the Company's
consolidated statements of operations through December 31, 2005, as all options
granted under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Effective January 1, 2006, the
Company adopted the fair value recognition provisions of FASB Statement No.
123(R), "Share-Based Payment" (SFAS 123R), using the modified-prospective-
transition method. Under that transition method, compensation cost recognized in
2006 includes: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006 based on the grant date fair value
calculated in accordance with the original provisions of SFAS 123, and (b)
compensation cost for all share-based payments granted subsequent to December
31, 2005, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R).
7
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
As a result of adopting SFAS 123(R) on January 1, 2006, the Company recognized
pre-tax compensation expense related to stock options of $108,030. The following
table illustrates the effect on net loss and net loss per share if the Company
had applied the fair value recognition provisions of SFAS 123 to options granted
under the Company's stock option plan for the three months ended March 31, 2005.
For purposes of this pro forma disclosure, the value of the options is estimated
using the Black-Scholes option-pricing model and is being amortized to expense
over the options' vesting periods.
Net loss, as reported $ (75,460)
Deduct: Total stock-based employee compensation
expense determined under the fair value of awards,
net of tax related effects 39,600
----------
Pro forma net loss $ (115,060)
==========
Reported net loss per share-basic and diluted $ (0.00)
==========
Pro forma net loss per share-basic and diluted $ (0.01)
==========
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and the EITF Issue No. 00-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." SFAS No. 123 states that equity
instruments that are issued in exchange for the receipt of goods or services
should be measured at the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
Under the guidance in Issue 00-18, the measurement date occurs as of the earlier
of (a) the date at which a performance commitment is reached or (b) absent a
performance commitment, the date at which the performance necessary to earn the
equity instruments is complete (that is, the vesting date).
New Accounting Pronouncements: The Financial Accounting Standards Board (FASB)
has issued Statements of Financial Accounting Standards No. 155, "Accounting for
Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and
140" and SFAS No. 156, "Accounting for Servicing of Financial Assets-an
amendment of FASB Statement No. 140" but they will not have a relationship to
the operations of the Company. Therefore a description and its impact for each
on the Company's operations and financial position have not been disclosed.
8
NOTE 2 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
At March 31, 2006 2005
--------------------------------------------------------------------------
Accounts Receivable, net
Accounts receivable $ 118,543 $ 57,458
Other receivable 185 -
Allowance for bad debt (2,611) (899)
--------------------------------------------------------------------------
Total $ 116,117 $ 56,559
--------------------------------------------------------------------------
Prepaid Expenses and Others
Prepaid insurance $ 43,210 $ 21,203
Prepaid rent and deposit 14,725 93
Other prepaid expenses 20,276 10,013
--------------------------------------------------------------------------
Total $ 78,211 $ 31,309
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Property and equipment, net
Furniture and Fixtures $ 9,531 $ 1,113
Equipment 46,333 13,331
Software 6,285 -
--------------------------------------------------------------------------
62,149 14,444
Less: accumulated depreciation (29,334) (13,609)
--------------------------------------------------------------------------
Total $ 32,815 $ 835
--------------------------------------------------------------------------
Accured Liabilities
Commission payable $ - $ 11,797
Accrued insurance 10,015 11,955
Warranty reserve 8,462 6,549
Accrued payroll and related taxes 17,666 -
Accrued interest - 6,339
Accrued consulting fees 19,090 -
Other 24,313 803
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Total $ 79,546 $ 37,443
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9
NOTE 3 - LONG-TERM DEBT
Long-term debt consists of the following:
AT MARCH 31, 2006 2005
--------------------------------------------------------------------------------
a.) Note payable to a related party., interest at
13% commencing January 1, 2006, due on December
31, 2007. Collaterized by substantially all of
the Company's assets and personal guarantee by
the CEO, and two shareholders. (1) $ 266,603 $ -
b.) Note Payable to Others, interest at 7% due and
payable on December 31, 2007. Convertible into
2,394,533 shares of common stock. (2) - 26,666
c.) Note Payable to Others, interest at 7% due and
payable on December 31, 2007. Convertible into
1,197,267 shares of common stock. (2) - 13,334
--------------------------------------------------------------------------------
266,603 40,000
Less: Current Maturities (144,926) -
--------------------------------------------------------------------------------
Long-term debt $ 121,677 $ 40,000
--------------------------------------------------------------------------------
(1) The debt initially bears interest at 0.75% above the Wall Street Journal
Prime Rate (8.0% at December 31, 2005) and matures on January 10, 2006. On
January 17, 2006, the note agreement was amended to reflect that the
payment date of the loan be extended for two years, that the interest rate
be increased to 13% per annum and that the remaining principal balance of
the loan be amortized and payable over 2 years.
(2) The note was converted into 3,591,799 shares of the Company's common stock
in April 2005.
NOTE 4 - INCOME TAXES
The provision for income taxes (benefits) consisted of the following:
For three months ended March 31, 2006 2005
----------------------------------------------------------------------------
Federal:
Current $ - $ -
Deferred 377 -
----------------------------------------------------------------------------
377 -
----------------------------------------------------------------------------
State:
Current 800 800
Deferred (11) -
----------------------------------------------------------------------------
789 800
----------------------------------------------------------------------------
Total $ 1,166 $ 800
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10
NOTE 4 - INCOME TAXES (CONTINUED)
The components of the deferred net tax assets are as follows:
At March 31, 2006 2005
------------------------------------------------------------------------------
Net Operating Loss Carryforwards $ 1,175,968 $ 220,993
Property and equipment (1,306) (199)
Accruals and reserves 2,017 (1,561)
Valuation Allowance (956,044) -
------------------------------------------------------------------------------
Net deferred tax assets $ 220,635 $ 219,233
------------------------------------------------------------------------------
The Company had removed the valuation allowance as of December 31, 2003 because
it believed it was more likely than not that all deferred tax assets would be
realized in the foreseeable future and was reflected as a credit to operations.
However, as of December 31, 2005, the Company's ability to utilize its federal
net operating loss carryforwards is uncertain due to the net loss of the year
and the merger with OrthoNetx which has net operating loss carryforwards
approximately of $1.7 million as of that date, and thus a valuation reserve has
been provided against the Company's net deferred tax assets.
As of December 31, 2005, the Company has net operating loss carryforwards of
approximately, $3,200,000 and $833,000 to reduce future federal and state
taxable income, respectively. To the extent not utilized, the federal net
operating loss carryforwards will begin to expire in fiscal 2009 and the state
net operating loss carryforwards will begin to expire in fiscal 2012.
NOTE 5 - STOCKHOLDERS' EQUITY
Private Placement Offering
In September 2005, OrthoNetx commenced a private placement offering ("Offering")
of equity securities to raise on a best efforts basis a maximum of $1,500,000 in
conjunction with the planned merger with Eye Dynamics discussed in Note 3. There
is no minimum amount required to be raised with the Offering. The Offering
consists of units priced at $50,000 per unit. Each unit consists of (a) shares
of the OrthoNetx's common stock at a price equal to the lesser of $.22 per share
or 90% of the average closing price of Eye Dynamics common stock over the 30
days prior to the closing of the merger with Eye Dynamics and (b) warrants to
purchase additional shares of the OrthoNetx's common stock equal to 50% of the
number of shares of common stock purchased in the Offering, exercisable for two
years at $.33 per share. Total proceeds from this offering were $650,000; the
Company received net proceeds of $602,779 after offering expenses. Additional
offering expenses of $81,250 were paid, of which $15,000 was paid in cash in
2005; $16,250 was paid in cash in 2006; and the balance of $50,000 was paid in
277,778 shares of AcuNetx's common stock. All cash proceeds were received in
January 2006 and total of 3,888,892 shares of AcuNetx's common stock, including
the 277,778 shares, were issued.
In March 2006, a Subscription Agreement from the 2005 Private Placement
Memorandum was fulfilled in the amount of $500,000, resulting in $450,000 net
proceeds after offering expenses. Galen Capital Group, the former financial
advisor, is the investor and received 2,777,778 shares of common stock of the
Company for their investment.
Exercising of stock warrants
During the first three months of 2006, there were stock warrants exercised. The
Company received total proceeds of $20,000. No stock warrants were exercised in
2005.
11
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
Non-Executive Directors' Stock Plan
On February 27, 2006 the Board of Directors agreed to provide 300,000 shares of
restricted stock to each of the four nonemployee directors as compensation for
2006 services pursuant to the 2006 Non-Executive Stock Plan established on March
27, 2006. The shares were valued at $0.25 which was the closing market price on
the date of grant. The total compensation of $300,000 was amortized on a
straight line basis over a twelve month period. During the three months ended
March 31, 2006, the Company recognized directors' compensation of $75,000. The
Plan shall be in effect until December 31, 2006. Share certificates are in
process of being issued.
Increase of Authorized Shares
In March 2006, the Board of Directors approved to increase the number of
authorized common stocks to 200 million. The amendment to its article of
incorporation will be filed in second quarter of 2006.
NOTE 6 - STANDBY EQUITY DISTRIBUTION AGREEMENT
On January 31, 2006, the Company entered into a Standby Equity Distribution
Agreement (SEDA) with Cornell Capital Partners, LP ("Cornell"), to finance the
continued development of its products. Under the agreement, Cornell has
committed to provide up to $12 million of equity financing to be drawn down over
a 24-month period at the Company's discretion. The financing will become
available after the Company has filed a Registration Statement covering the
securities with the Securities and Exchange Commission (the "SEC"), and the SEC
has declared the Registration Statement effective. The maximum amount of each
drawdown is $500,000, and there must be at least five trading days between
drawdowns.
Under the Standby Equity Distribution Agreement, each drawdown is actually a
sale by the Company to Cornell of newly-issued shares of common stock, in the
amount necessary to equate to the desired cash proceeds. Cornell will pay the
Company 98% of, or a 2% discount to, the lowest closing bid price of the
Company's common stock during the five consecutive trading day period
immediately following the date the Company notifies Cornell that the Company
desires to access the Standby Equity Distribution Agreement. Under the
agreement, the Company may not issue Cornell a number of shares of common stock
such that it would beneficially own greater than 9.99% of the Company's
outstanding shares of common stock.
In addition, Cornell Capital Partners will retain 5% of each cash payment under
the Standby Equity Distribution Agreement as a commitment fee. The Company also
issued 1,450,000 shares of common stock to Cornell Capital Partners as a
one-time commitment fee. The 2% discount, the 5% commitment fee and the shares
of common stock are considered to be underwriting discounts payable to Cornell
Capital Partners. The Company also paid $5,000 as a due diligence fee to Cornell
Capital Partners.
The Company also agreed to pay Yorkville Advisors, LLC, an affiliate of Cornell
Capital Partners, a structuring fee of $10,000 upon the earlier to occur of (i)
the first drawdown under the Standby Equity Distribution Agreement, or (ii)
April 21, 2006, as well as a fee of $500 per advance made.
Under the agreement, the Company shall issue three warrants to purchase the
Company's common stock to Cornell. The first is a one-year warrant for 250,000
shares, with an exercise price of $0.50 per share. The second is a two-year
warrant for 250,000 shares, with an exercise price of $1.00 per share. The third
is a three year warrant for 500,000 shares, with an exercise price of $2.00 per
share.
12
NOTE 6 - STANDBY EQUITY DISTRIBUTION AGREEMENT (CONTINUED)
The Company agreed to register for resale, on Form SB-2, the shares of common
stock which the Company sell to Cornell Capital Partners under the Standby
Equity Distribution Agreement, as well shares issuable upon exercise of the
warrants and the shares issued as a commitment fee.
The Company engaged Monitor Capital, Inc., a registered broker-dealer, to act as
placement agent in connection with the Standby Equity Distribution Agreement,
pursuant to a Placement Agent Agreement dated as of January 31, 2006. The
Company shall pay Monitor Capital, Inc. 50,000 shares of Common Stock as a fee
under the Placement Agent Agreement.
NOTE 7 - STOCK OPTIONS
On March 27, 2006 the Board of Directors approved and adopted the 2006 Stock
Incentive Plan to provide for the issuance of incentive stock options and/or
nonstatutory options to all employees and nonstatutory options to consultants
and other service providers. Generally, all options granted to employees and
consultants expire ten and three years, respectively, from the date of grant.
All options have an exercise price higher than the fair market value of the
Company's stock on the date the options were granted. It is the policy of the
Company to issue new shares for stock option exercised and restricted stock,
rather than issue treasury shares. Options generally vest over three years. The
plan reserves 14 million shares of common stock under the Plan and shall be
effective through December 31, 2015. On January 3, 2005, the Board of Directors
approved to issue stock options to directors in the amount of 20,000 shares for
each of the years from 1999 through 2004. The total options for each of
directors shall be 120,000 shares. The options are vesting immediately and
exercisable at $0.15 per share through January 3, 2007.
A summary of the status of stock options issued by the Company as of March 31,
2006 and 2005 is presented in the following table.
2006 2005
---------------------------------------------------------------
Weghted Weghted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
---------------------------------------------------------------
Outstanding at beginning of year 415,000 $ 0.15 - $ -
Granted 6,765,000 0.21 360,000 0.15
Exercised/Expired/Cancelled - - - -
--------------- ---------------
Outstanding at end of period 7,180,000 $ 0.20 360,000 $ 0.15
=============== ===============
Exercisable at end of period 1,150,000 $ 0.18 360,000 $ 0.15
=============== ===============
The fair value of each stock option granted is estimated on the date of grant
using the Binominal Lattice option valuation model for 2006 and the
Black-Scholes Merton option valuation model for 2005. Both models use the
assumptions listed in the table below. Expected volatilities are based on the
historical volatility of the Company's stock. The risk-free rate for periods
within the expected life of the option is based on the U.S. Treasury yield curve
in effect at the time of grant.
13
NOTE 7 - STOCK OPTIONS (CONTINUED)
2006 2005
------------------------
Weighted average fair value per option granted $ 0.17 $ 0.11
Risk-free interest rate 4.40% 3.18%
Expected dividend yield 0.00% 0.00%
Expected lives 9.93 2.00
Expected volatility 162.13% 163.36%
As of March 31, 2006, there was $1,016,311 of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the various plans. That cost is expected to be recognized over a weighted
average period of 2.7 years.
NOTE 8 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share for three months ended March 31st:
2006 2005
----------------------------------------------------------------------------
Numerator:
Net loss $ (842,530) $ (75,460)
Denominator:
Weighted average of common shares 53,860,247 17,949,748
Net loss per share - basic and diluted $ (0.02) $ (0.00)
As the Company incurred net loss for the three months ended March 31, 2006, the
effect of dilutive securities totalling 693,276 equivalent shares have been
excluded from the calculation of diluted loss per share because their effect was
anti-dilutive.
As the Company incurred net loss for the three months ended March 31, 2005, the
effect of dilutive securities totalling 4,064,299 equivalent shares have been
excluded from the calculation of diluted loss per share because their effect was
anti-dilutive.
NOTE 9 - MERGERS AND ACQUISITIONS
Pursuant to the Agreement and Plan of Merger ("ONX Agreement") with OrthoNetx,
Inc., a privately-held company in Colorado, dated September 1, 2005, the Company
acquired 100% of the issued and outstanding common stock of OrthoNetx. The
acquisition was completed on December 23, 2005.
OrthoNetx, Inc., which was formed in 1996, develops, manufactures, markets and
supports proprietary medical devices for distraction osteogenesis (mechanically
induced growth of new bone and adjacent soft tissues) to treat human
bone-related tissue deficiencies and deformities, both congenital and acquired.
OrthoNetx has patented and developed its GENEROS(TM) family of distraction
osteogenesis devices for infants, children and adults with: (a) craniofacial
deformities and mandibular, maxillary and/or alveo (dental) bone loss, and (b)
deficiencies and malformations of the upper and lower limbs, and in the bones of
hands and feet.
14
NOTE 9 - MERGERS AND ACQUISITIONS (CONTINUED)
Under the terms of the ONX Agreement, the shareholders of ONX will receive the
number of shares equal to the number of outstanding shares of EDI's common
stock, including stock options and stock warrants at the closing date. As a
result, each outstanding share of ONX's common stock was converted into
approximately 0.805 shares of AcuNetx's common stock. Immediately upon the
completion of the merger, ONX's CEO became the CEO of AcuNetx.
The acquisition was accounted for as a business combination, and accordingly,
the tangible assets acquired were recorded at their fair value at December 23,
2005. The results of operations of OrthoNetx have been included in the Company's
consolidated financial statements subsequent to that date. The total purchase
price is $4,705,699, and is comprised of:
Stocks issued to acquire the outstanding common
stock of OrthoNetx (22,494,953 shares at $0.18 per share) $ 4,049,092
Acquisition related transaction costs (3,647,818 shares at
$0.18 per share) 656,607
-----------
Total purchase price $ 4,705,699
===========
The fair value of the purchase price was valued at $0.18 per share, which
represented the closing price of the Company's stock at December 23, 2005.
Acquisition related transaction costs include 3,647,818 shares issued to a
financial advisor of ONX. The allocation of the purchase price to assets
acquired and liabilities assumed is presented in the table that follows:
Tangible assets acquired $ 136,169
Property and equipment 29,772
Intangible assets 89,621
Goodwill 4,823,138
Other non-current assets 187,233
Liabilities assumed (560,234)
-----------
Total purchase price $ 4,705,699
===========
The following summary, prepared on an unaudited pro forma basis, reflects the
condensed consolidated results of operations for the three months ended March
31, 2005 assuming OrthoNetx had been acquired at the beginning of the periods
presented:
2005
----------
Net revenue $ 320,909
Net loss $ (320,795)
Basic and diluted net loss per share $ (0.01)
PrivaComp, Inc.
On May 27, 2005, OrthoNetx, Inc. entered into an Agreement and Plan of Merger
("PrivaComp Agreement") with PrivaComp, Inc., a Delaware corporation that is in
the business of developing technologies to provide patients with secure access
to their medical records and control over their medical privacy. PrivaComp is
considered a development stage company. The majority shareholder and CEO of
PrivaComp is also the CEO and a shareholder/director of OrthoNetx. Under the
terms of the PrivaComp Agreement, all of the issued and outstanding shares of
PrivaComp stock were cancelled and converted into 1,000,000 shares of
OrthoNetx's common stock. OrthoNetx is the surviving corporation and assumed all
assets and liabilities of PrivaComp, consisting primarily of developed software,
a pending patent application and accounts payable. The merger was effective June
30, 2005.
15
NOTE 9 - MERGERS AND ACQUISITIONS (CONTINUED)
PrivaComp and OrthoNetx are related through common ownership. Accordingly, the
assets and liabilities of PrivaComp have been recorded by OrthoNetx at
historical cost at June 30, 2005 as follows:
Assets:
Intellectual Property $ 54,567
Liabilities:
Accounts Payable (62,669)
----------
Net liabilities assumed $ (8,102)
==========
PrivaComp had no activity during the three months ended March 31, 2005;
therefore, no pro forma information has been presented.
NOTE 10 - MAJOR CUSTOMERS
During the three months ended March 31, 2006, two major customers accounted for
$266,423 or 94% of IntelliNetx division revenues.
National distributor $199,250 or 70.3%
Foreign distributor $67,173 or 23.7%
During the three months ended March 31, 2005, the national distributor accounted
for $254,752 or 80.49% of IntelliNetx division revenues.
NOTE 11 - SEGMENT INFORMATION
The Company evaluates its reporting segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The Chief
Executive Officer has been identified as the Chief Operating Decision Maker as
defined by SFAS No. 131. The Chief Executive Officer allocates resources to each
segment based on their business prospects, competitive factors, net sales and
operating results.
In 2006, the Company changed the structure of its internally organization to
develop three market-oriented operating divisions: (i) IntelliNetx (INX)
division, (ii) OrthoNetx (ONX) division, and (iii) VisioNetx (VNX) division. The
IntelliNetx division markets patented medical devices that assist in the
diagnosis of dizziness and vertigo, and rehabilitate those in danger of falling
as a result of balance disorders The OrthoNetx division markets patented medical
devices that mechanically induce new bone formation in patients with skeletal
deformities o the face, skull, jaws, extremities and dentition. The VisioNetx
division markets patented products that track and analyze human eye movements.
The Company also has other subsidiaries that do not meet the quantitative
thresholds of a reportable segment.
The Company reviews the operating companies' income to evaluate segment
performance and allocate resources. Operating companies' income for the
reportable segments excludes income taxes and amortization of goodwill.
Provision for income taxes is centrally managed at the corporate level and,
accordingly, such items are not presented by segment. The segments' accounting
policies are the same as those described in the summary of significant
accounting policies.
Intersegment transactions: Intersegment transactions are recorded at cost.
16
NOTE 11 - SEGMENT INFORMATION (CONTINUED)
Summarized financial information of the Company's results by operating segment
is as follows:
Three months ended March 31,
2006 2005
-----------------------------------------------------------------------------
Net Revenue:
IntelliNetx $ 283,575 $ 316,909
OrthoNetx - -
VisionNetx - -
------------------------------
Net Revenue by reportable segments 283,575 316,909
All other operating revenue - -
------------------------------
Consolidated Net Revenue $ 283,575 $ 316,909
-----------------------------------------------------------------------------
Operating loss:
IntelliNetx $ (3,195) $ (73,916)
OrthoNetx (37,282) -
VisionNetx (80,283) -
------------------------------
Operating loss by reportable segments (120,760) (73,916)
All other operating loss (697,743) -
------------------------------
Consolidated Operating Loss $ (818,503) $ (73,916)
-----------------------------------------------------------------------------
Net loss before tax:
IntelliNetx $ (695) $ (74,660)
OrthoNetx (62,612) -
VisionNetx (80,283) -
------------------------------
Net loss by reportable segments (143,590) (74,660)
All other net losses (697,774) -
------------------------------
Consolidated Net Loss before tax $ (841,364) $ (74,660)
-----------------------------------------------------------------------------
At March 31,
Total Assets: 2006 2005
----------------------------------------------------------------------------
IntelliNetx $ 1,040,287 $ 1,357,717
OrthoNetx 5,631,826 -
VisionNetx - -
---------------------------------
6,672,113 1,357,717
All Other Segments -
---------------------------------
Consolidated assets $ 6,672,113 $ 1,357,717
----------------------------------------------------------------------------
17
NOTE 12 - SALES INCENTIVE AGREEMENTS
In April 2005, the Company entered into two individual agreements with the
national distributor and a special instrument dealer. The agreements provide
that the Company will issue restricted common stock to the distributor and
dealer as a sale incentive if certain conditions are reached pursuant to the
agreements. As of March 31, 2006, none of these conditions are reached and the
Company issued no shares.
NOTE 13 - GUARANTEES AND PRODUCT WARRANTIES
The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company's use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its balance sheet as of March 31, 2006.
In general, the Company offers a one-year warranty for most of the products it
sold. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary
The following table presents the changes in the Company's warranty reserve
during the first quarter of 2006 and 2005:
2006 2005
--------------------------
Balance as of beginning of period $ 8,462 $ 8,884
Provision for warranty 802 759
Utilization of reserve (802) (3,094)
------- -------
Balance as of end of period $ 8,462 $ 6,549
======= =======
NOTE 14 - SUBSEQUENT EVENTS
Manufacturing, Sales, Licensing, and Software Agreement
The Company is still negotiating to reconfigure its relationship with its
national distributor including terms of the Manufacturing, Sales, Licensing, and
Software Agreement with the national distributor.
Departure and Election of Chairman of the Board of Directors
On May 2, 2006, Stephen D. Moses resigned from the Board of Directors of
Registrant and as Chairman of the Board of Directors. The resignation arose out
of disagreements about the management and direction of the Company. The
remaining Directors of the Company disagree with the assertions of Mr. Moses.
On May 3, 2006, Charles Phillips, the Company's co-founder in 1988 and currently
a Director, was elected as the Chairman of the Board of Directors of the
Company.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BUSINESS OVERVIEW
AcuNetx is organized around three separate divisions: (i) a medical
division with neurological diagnostic equipment, (ii) a medical division with
devices that create new bone, and (iii) a division with products for
occupational safety and law enforcement. For all its devices, AcuNetx is
integrating an information technology (IT) platform that allows the device to
capture data about the physiological condition of a human being. Our IT platform
is designed to gather data and connect the device-related data with users and
support persons. Its products include the following:
o Neurological diagnostic equipment that measures, tracks and records
human eye movements, utilizing our proprietary technology and computer
software, as a method to diagnose problems of the vestibular (balance)
system and other balance disorders.
o Devices designed to test individuals for impaired performance
resulting from the influences of alcohol, drugs, illness, stress and
other factors that affect eye and pupil performance. These products
target the occupational safety and law enforcement markets.
o Orthopedic and craniomaxillofacial (skull and jaw) surgery products,
which generate new bone through the process of distraction
osteogenesis.
o A proprietary information technology system called
SmartDevice-Connect(TM) ("SDC") that establishes product registry to
individual patients and tracks device behavior for post-market
surveillance, adverse event and outcomes reporting, and creates "smart
devices" that gather and transmit physiological data concerning the
device and its interaction with the patient.
RESULTS OF OPERATIONS
THREE MONTHS ENDING MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31,
2005.
The first quarter of 2006 represents the first period of combined AcuNetx,
Inc. operations, comprised of the former AcuNetx, Inc. and the former OrthoNetx,
Inc. This discussion compares the combined 2006 first quarter results with the
first quarter of 2005, which consists solely of the former Eye Dynamics, Inc.
Revenues during the first quarter of 2006 were $283,575, compared to
$316,909 for the corresponding period in 2005. Cost of sales stayed relatively
static as a percentage of sales. Total operating expenses increased by $740,491,
from $240,774 in the first quarter of 2005 to $981,265in the first quarter of
2006. The decreased revenues and increased selling, general and administrative
expenses resulted in a loss of $842,530 for the current period, compared to a
loss of $75,460 for the same period in the previous year.
19
Sales have stabilized after trending downward in prior quarters. The
Medicare reimbursement issue mentioned in previous discussions has, for the most
part, been resolved, and is no longer hindering sales. Our domestic distributor
and sub-distributors believe that this will further open sales opportunities,
and are making plans to address those opportunities. We are also expanding our
offshore marketing. We are working with all of our marketing channels to
formulate a consistent message to highlight our product and company strengths.
Operating expenses were inflated by the legal and financial requirements of
the acquisition of OrthoNetx, which included necessary legal filings, audit
consolidation and filing, stock distribution, and accounting work. In addition,
we commenced work on the information technology aspects of the combined
companies, as well as the work necessary to produce a consistent, up to date
public image for the Company. We instituted work on intellectual property
protection to cover or extend coverage for key Company assets. Design work for
the entire project that will bring our Safety and Law Enforcement products to
market was also started in earnest, with appropriate expenditures. Standard
selling, general and administrative expenses for both AcuNetx and OrthoNetx did
not increase significantly, but the OrthoNetx expenses make up a portion of the
year to year growth.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of March 31, 2006 of $787,313 allows for
payment of all outstanding invoices on a current basis. The Company is in the
process of repaying a loan from the founder of OrthoNetx, and is current on
those payments.
Inventory as of March 31, 2006 was $346,607, compared to $263,381 at March
31, 2005. Purchasing for all VNG products has been adjusted to a level
consistent with lower sales. OrthoNetx products, both the GenerOs CF and GenerOs
SB, account for the overall increase year to year. Accounts receivable as of
March 31, 2006 were $116,117. While this represents a larger than usual balance,
there were two invoices outstanding at the end of the period while corrections
were made, and both have since been collected.
Accounts payable as of March 31, 2006 were $225,309, compared to $21,352 at
March 31, 2005. The growth was primarily due to increased activity in the
combined companies' selling, general and administrative expense, and all
accounts are current. OrthoNetx had previously acquired a private firm, and has
been carrying accounts payable at full value until a settlement, currently under
discussion, is resolved.
Sales prospects for the balance of 2006 appear strong, as we expect our
entire range of products to be refreshed, and new products to enter the
marketplace. In early April we announced that our VNG products have been
approved by the U. S. Government Services Administration to be listed on the
Federal Supply Schedule, which permits access to all military and VA hospitals
around the world. Budgets for product development and refinement have been
increased, and the results of that work should be in the market later this year.
We plan to continue to use trade shows, print and electronic media, and
distributors to carry our message to our customers and support organizations.
ITEM 3. CONTROLS AND PROCEDURES.
At the end of the period covered by this Form 10-QSB, the Company's
management, including the Chief Executive and Chief Financial Officers,
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures. Based on this evaluation, the Chief Executive and Chief
Financial Officers have determined that such controls and procedures are
effective to ensure that information relating to the Company required to be
disclosed in reports that it files or submits under the Securities Exchange Act
20
of 1934 is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
There have been no changes in the Company's internal controls over financial
reporting that were identified during the evaluation that occurred during the
Company's last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
31.1 Certification of the Company's Chief Executive Officer
Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934
31.2 Certification of the Company's Interim Chief Financial Officer
Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934
32.1 Certification of the Company's Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
32.2 Certification of the Company's Interim Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 19, 2006
By: /s/ Terry Knapp
----------------------
Terry Knapp, President
21